India’s war on cash has at least two likely victors: Visa and Mastercard

As India grapples with removing the bills, Visa and Mastercard will probably begin expanding their relationships with merchants and issuers in the country.Bloomberg | November 24, 2016, 10:17 IST

By Jenny Surane

The world’s largest payment networks will see a surge in transactions and cardholders after the Indian government’s decision this month to remove high-denomination bills from circulation, according to analysts who cover the companies.

The two networks have been pushing for this kind of change in India, where a McKinsey & Co. study found that more than 90% of transactions are still conducted in cash.

“Visa and Mastercard both benefit as paper currency or checks turn toward electronics,” said Moshe Orenbuch, an analyst at Credit Suisse Group AG who has a buy recommendation on both stocks. “When we think about where they are investing, they look toward areas where there is the potential to accelerate that transition,” he said, adding that the recent changes in India are “something they know how to move in on.”

Five-hundred rupee and Rs 1,000-rupee notes ceased to be legal tender in India on Nov. 9 and must be deposited in banks by the end of the year, Prime Minister Narendra Modi said in a surprise announcement this month, sweeping away 86% of the total currency in circulation. The move is seen as an attempt to fulfill his election promise of curbing tax evasion and recovering illegal income, locally known as black money, stashed overseas.

Accelerating Payments

Visa released a report in October that laid out a framework for accelerating digital-payment acceptance in India that it said could save the country $70 billion over the next decade. Amitabh Kant, who heads the government’s National Institute for Transforming India Aayog, said the report would help inform the discussion already underway on the topic.

“We are undertaking various measures to transition to a less-cash society,” Kant said in a letter attached to the report. “Achieving this goal would not only help reduce the size of the shadow economy in our country and the circulation of black money, but also lead to a significant increase in jobs.”

Mastercard “welcomes and supports” Modi’s decision, Porush Singh, the company’s president for South Asia, said in a statement. The prime minister’s “bold action and leadership is a critical step in positioning India to be a leader in the global cashless and digital economy movement.” Visa, based in San Francisco, had no immediate comment.

Mastercard partnered with the Indian government and the Indian Banks’ Association to develop policies that would encourage electronic payments in the country, Ari Sarker, co-president for Asia Pacific, said at a company investor day in September. Chief Executive Officer Ajay Banga has met with Modi on multiple occasions in his roles as member of the U.S.-India CEO Forum and former chairman of the U.S.-India Business Council’s board.

Mastercard’s business “is converting people from cash to electronic payments,” Banga said in an interview this year with consulting firm PwC. “Our single biggest contribution to society is taking cash out of the system. People think cash is free. Cash is not free.”

‘War on Cash’

Banga, a native of India, first declared a “war on cash" in 2010, shortly after taking over as CEO.

“More than 80% of retail transactions in the world are still cash,” Banga told investors at the time. “Just that one number tells you how much opportunity exists. Now, of course, in countries like India and Russia, it’s an even higher proportion."

As India grapples with removing the bills, Visa and Purchase, New York-based Mastercard will probably begin expanding their relationships with merchants and issuers in the country, said David Koning, an analyst at Robert W. Baird & Co.

“The big-scale players like Mastercard and Visa have so much more that they can invest over time, and they have good fraud and security products,” said Koning, who also has buy recommendations on both stocks. In situations similar to what’s going on India, the two networks “tend to be the winners,” he said.